US Treasury Research Office Studies Implications Of CBDC On Private Bank Deposits

The Office of Financial Research of US Treasury commissions a study about implications of CBDC on bank’s deposits, possible effects on bank runs and financial stability. The authors, economics professors, arrive at optimistic results with assumption of better transparency provided by technological features of CBDC and less maturity transformations by banks due to attractiveness of saving of the short-term funds in CBDC.

The Office of Financial Research (OFR) of the US Treasury published a working paper on CBDC authored by professors of Economics, Todd Keister of Rutgers University and Dr Cyril Monnet of the University of Bern. Todd Keister’s recent publications covered bank crises and bailouts, he talks about CBDC where he serves as a research consultant with the OFR. Cyril Monnet researches financial stability issues.

The Office of Financial Research and Financial Stability Oversight Council of US government were established by the Dodd-Frank reform in response to the financial crisis of 2018. The former is tasked with data collection, research and development to support the activities of the latter.

So, the study expectedly discusses the informational aspects of CBDC and its effect on financial stability. The authors took on the task to evaluate the concern that the introduction of CBDC could affect deposits of banks, in particular, incentivize bank runs.

The result of the study is optimistic: in their model, CBDCs do take some portions of private banks short term deposit business. Yet, they argue a) less maturity transformation by banks will decrease probability of liquidity shocks and b) financial flows to CBDC can provide important early signals to the Treasury in case of a financial crises.

The information in the thesis is clear — the informational, monitoring possibilities with CBDC are welcomed by Central banks. Private banks will no longer hold the primary and almost exclusive access to the final user flows. Unlike paper bills, CBDCs will put light on the flows of this Treasury issued money. In this study the authors bring one example of it: if depositors of a certain bank transfer their deposits to CBDC then they might possess otherwise private information about the problems with that bank.

The first proposal about less maturity transformation might be good for financial stability, but will banks be happy with it? Also, the lost niche may be compensated by other activities exposing them to different set of risks. The study also mentions the fundamental short-term liquidity requirement of banks — if all current accounts are in CBDC’s, banks can’t do simple cashier operations. The authors discuss that CBDC interest or some holding restrictions should be used to manage short term fund volumes with private banks.

In general, the programmability of new money opens new horizons and brings them closer to the Treasury. CBDCs can be programmed at regional, bank and even individual level. It may affect the interest rate, holding fees, fungibility, and hence its value. Worth observing the results.